Insurance

Insurance is something that most people don’t really think about unless they really need it. Yet don’t get desperate and just pick up any insurance. In order to get the most savings possible, you need to be as strategic about insurance as you are about anything else in life. If you don’t do this, then you’re bound to have problems in the long run. It would make a lot more sense from every angle if you just thought about the prevailing myths of insurance. Here’ a few classic ones we wanted to highlight

1 — Affluent Areas Pay Less in Terms of Insurance on Homes and Cars

This is one of the biggest myths around, and it’s one that can cost you big as a homeowner. You might assume that coverage is going to be a lot less since you live in a well to do neighborhood. However, insurance companies are looking at it differently. They feel that you are much more risky in this category because you have everything to lose. Thieves are going to want to hit wealthy neighborhoods because of the higher likeliness of actually getting stuff to take with them. There’s no reason to feed this type of behavior at all. You need to always think about what you’re going to ultimately do in the long run.

It would be better to accurately get a quote for your home based on the contents. Just because you live in a postcode that’s known for expensive living doesn’t mean that you’re necessarily meeting that standard yourself.

You have to always make sure that you’re looking at the bigger picture here, and that’s definitely going to be getting the most accurate quote you can. Don’t forget that you might be able to save money on that quote by paying annually rather than semi annually or monthly. It just depends on the insurer.

2 — Everyone Needs Life Insurance — Including Single People

This is a big myth that has pushed a lot of people to own life insurance even when they really don’t have a need for it. You might think that it’s wise to have life insurance, but if it’s just you then there’s really no point. Life insurance is better served for people who are the primary income provider of a family. This means that if something happens to them, they would have that insurance money to pass to their loved ones.

3 — Your Insurance Company Has to Approve All Claims When The Worst Happens

This myth is saved for last, as it really does get people in trouble. Let’s say that a burglar breaks into your house while you’re out shopping. If it’s proven that you didn’t take reasonable care to secure your property and/or your possessions, the entire claim can be turned down. That’s a tough pill to swallow but it’s reality. Insurance companies are all about risk management. They would lose profits in a flash if they approved every single claim out there. What you’re going to have to do is make sure that you’re thinking about the bigger picture and protecting your belongings to the fullest — even if you’re just going down the road for a few minutes.

It’s very evident that you will need to look over any policy that you do have right now. Looking over the fine print is something that’s always recommended, but you might be surprised at how often people really don’t take time to do this. They just assume that the insurance company is always going to be on their side, but this is definitely not the case either. The insurance company is looking out for itself and its shareholders. While it wants to give you a superior product, the reality is that there has to be restrictions of some kind in place. Study your policy well and if you have questions — make sure that you speak up. Good luck!

1. Insurance companies are unlikely to win any popularity contests. Why then are there so many of them? The answer is as old as time: we want to buy protection from the risk of catastrophic losses. These catastrophes could affect our health, our homes, our family, our livelihoods — and, in so doing, wipe out our life-long savings. Even the mere possibility of such losses weighs on our peace of mind.

2. The risk of such losses might be slim, but we’re willing to pay for protection against them. In fact, we’re willing to overpay. If, for example, the chance of a million-dollar loss is only 1/10 of one percent, the expected loss is $1000. But people might be willing to pay twice that amount to avoid the possibility of a financial catastrophe. In this sense, people are risk averse.

3. By offering protection against losses, an insurance company takes on the risk of each individual. By offering insurance policies to many people, however, the company actually reduces its total risk.

Although there is no way to know if any particular individual will suffer a loss, the total amount which must be paid every year is fairly predictable. This is because of the Law of Large Numbers. The same reasoning applies to a flip of a coin: if you flip it once, it will be either 100% heads or 100% tails; if you flip it one thousand times, you can predict within a percent that the results will be 50% each way.

Part II

The combined ratio

The benefits of timing

Buyer beware

1. Insurance companies write policies and receive revenues, known as premiums. These premiums must cover two types of expenses: the costs of selling the policies and the costs of paying customers when losses are incurred.

If you compare the two costs against the revenues from premiums, you have the combined ratio. Let’s say, for example, that an insurance company pays out 40% of revenues to its salesforce/staff and it pays out 50% of revenues to its policyholders. Ninety cents of every revenue dollar are spent on expenses, and the combined ratio would be 90.

2. Several decades ago, insurance companies were permitted to get together and set their policy rates such that the combined ratio was 100. Since a ratio of 100 means that each dollar of revenue is spent on costs, this doesn’t sound like a great deal for the companies — but it was!

How can a company prosper if all the money it receives is paid out in expenses? By taking in the money now and paying it out much later. Money received now, known as the insurance float, can be invested — and the profits from those investments stay with the company. It’s as if you borrowed money at a 0% interest rate, invested that money, and were allowed to keep whatever you earned from the investments.

3. Because of timing — revenues received now, expenses paid later — a combined ratio of 100 is a license to print money. But the industry has become intensely competitive and combined ratios well over 100 are now common. Since insurance companies have less control over their revenues, they have become increasingly focused on controlling their expenses.

Always bear in mind that, when you buy insurance, you are buying a promise to pay — and you should be very careful whose promises you rely upon. Make certain that the insurance companies with which you deal have strong financial ratings from A.M.

Best and other rating agencies. Also, look for companies which spend a lower percentage of earnings on sales commissions and administrative expenses — these companies can afford to give you better rates on their insurance policies.

With the way that we are all finding prices so high at the momenta n no one is getting pay rises, then we want to find the best price for everything. Some people spend a lot of time searching around for good prices on things like food and toiletries, but it can make a much bigger impact if you save money on those things which cost you big quantities of money, such as insurance. Some insurance can be extremely expensive and so it is well worthwhile taking a look to see whether any money can be saved.

There are a lot of ways that you can do this. You can go to a broker, use a comparison website or do the searching yourself. Each of these is likely to get you a better price than just going with the first company you come across or with a financial institution that you currently use. However, it is well worth taking some time to think about each method and which one will work best for you. A broker is useful if you have no time to do any searching yourself or just do not have the confidence. They will hunt around for you and tell you about the options, pointing you towards a certain one. The disadvantage in this is that they might pick the one that will pay them the most commission rather than the one that saves you the most money.

A comparison website will give you details of a selection of companies insurance deals and you can see which appeals to you the most. This can save time and get you a cheaper deal, but it does not include all companies. Some are not on comparison websites and comparison websites differ in the companies and policies they list. So searching yourself through all of the options can be a better option, but it can be rather daunting and time consuming. However, if you do a search online and look at all the companies you are familiar with, you should soon be able to draw up a short list that you are interested in. Then it can be a case of phoning each of them and getting a bit more information before you decide who to go with. You may even be able to negotiate a better deal over the phone, than you can find online.